European Central Bank chief Mario Draghi pledged unconditional support for Europe’s single currency on Thursday, sending stock markets soaring and sharply reducing pressure on Spanish interest rates.
The «ECB is ready to do whatever it takes to preserve the euro. And believe me it will be enough,» Draghi told the Global Investment Conference, a forum organized by the British government in London.
The ECB president called the euro «irreversible,» and moved markets by saying that keeping sovereign debt risk under control fell within the bank’s remit because they «hamper the functioning of the monetary policy transmission channels.”
Draghi stressed that «we have to cope with this financial fragmentation by addressing these issues.”
That suggested the central bank was preparing to act, possibly by resuming purchases of sovereign bonds on secondary markets or by coming up with a way to provide critical eurozone financial rescue funds with more resources.
The ECB has come under growing pressure to find ways of easing tension on government bond markets as the borrowing price, or yield, on Spanish 10-year debt climbed above 7.0 percent to levels at which other eurozone countries had to ask for international bailouts.
Following Draghi’s remarks, the yield on 10-year Spanish bonds dropped to 6.977 percent from 7.376 percent on Wednesday, a level that is nonetheless still considered unsustainable over the long term.
In afternoon trades on European stock markets, London’s benchmark FTSE 100 index jumped 1.43 percent to 5,577.13 points, the Paris CAC 40 leapt 3.10 percent to 3,177.38 points and Frankfurt’s DAX 30 rose 1.82 percent to 6,522.95.
The Italian stock market leapt by 4.20 percent and the Spanish exchange gained more than 3.80 percent.
The euro spiked as high as $1.2316. That compared with 1.2153 in New York late Wednesday.
“This morning’s comments by ECB president Mario Draghi look to have been the main catalyst sending the markets higher,» CMC Markets analyst Michael Hewson told AFP.
“In particular the comments about doing whatever it takes within the central bank’s mandate to preserve the euro has seen markets rebound, but the statement that addressing high yields on sovereign debt in the euro area comes within the central bank’s mandate is particularly noteworthy.
“It suggests that the ECB may well do something about capping rising bond yields. Attention will now inevitably shift the focus towards next week’s ECB rate meeting to see if he (Draghi) means what he says,» Hewson added.
For ABN Amro economist Nick Kounis: «Draghi has opened the door for a re-start of the central bank’s government bond purchase program.
“The crisis response looks likely to focus on direct intervention in the government bond market,» he added.
Financial markets have relentlessly tested the eurozone’s ability to overcome debt crises in countries like Greece, Ireland, Portugal and Spain, and the ECB is the only European Union institution able to react quickly to developments.
ECB responses to date include two cash injections totalling more than one trillion euros ($1.21 trillion) in the eurozone banking system via long-term refinancing operations and the purchase of government bonds on secondary markets.
The central bank has also cut its benchmark refinancing rate to a record low of 0.75 percent.
Eurozone leaders have agreed meanwhile on ways to help stem the crisis, and Draghi stressed that «progress has been extraordinary in the last six months».
But analysts have said that Europe’s current anti-crisis strategy is having only a limited effect.
ETX Capital economist Ishaq Siddiqi felt that the comments by Draghi, which followed others by ECB governing council member Ewald Nowotny suggested that the central bank might also look to bolster the future eurozone rescue fund, the European Stability Mechanism. [AFP]